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Wall Street Banks Have Their Eyes on Corporate Bonds

With the Federal Reserve winding down its bond purchases, big Wall Street banks are salivating at the opportunity to scoop up corporate bonds.

With inflation running hot, the Fed is also looking to push interest rates higher this year as the economy continues to recover from the pandemic. Before that happens, banks are looking to add corporate bonds to their portfolios before rising rates push borrowing costs higher.

“Wall Street’s biggest banks are expected to hit the corporate bond market after they report quarterly results in an effort to raise money before the Federal Reserve knocks borrowing costs higher,” Bloomberg reports. “JP Morgan Chase & Co. credit research analysts Kabir Caprihan and Nikita Dyatlov expect big banks to borrow a combined $24 billion to $32 billion following their earnings reports. Citigroup Inc., Wells Fargo & Co. and JP Morgan itself all announced results this past week.”

“That said, we do think the bias is on the upside and will not be surprised if we see closer to $35-$38 billion,” the JPMorgan analysts say in a note.

A Short-Term Corporate Bond to Consider

As rates rise, this could erode bond income with investors missing out on yield. That said, getting short duration can help mitigate rate risk with exchange traded funds (ETFs) like the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH).

“Investors are looking to shorter-term bonds as they grow more concerned about rising yields, which can hit longer-term bonds hardest,” the Bloomberg report adds.

“We love shorter dated credit as a natural hedge against inflation, rising rates and potentially deteriorating credit fundamentals,” said Hunter Hayes, senior vice president and portfolio manager of the Intrepid Income Fund at Intrepid Capital Management. The report also noted that Hayes foresees opportunities in investment-grade as well as high-yield when bonds mature over the course of the next couple of years.

Today's Deals

VCSH seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index.

This index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between one and five years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.

For more news, information, and strategy, visit the Fixed Income Channel.

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// UPDATED ON 21/09
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